Mark Lister: Emerging markets ones to watch in 2011

General Motors is an American institution. Photo / General Motors

Opinion

General Motors, the carmaker responsible for the legendary Corvette sports car, is an American institution.

But last year, GM sold more cars in China than it did in the United States.

For the first time in the company's 102-year history, the US is not the most important market for the iconic brand. The previous year, China was No 2, but GM's China sales increased 29 per cent last year, compared with a rise of only 6 per cent in its US sales.

And it's not just the Chinese market that is growing in importance - Uzbekistan is now the company's No 10 market by volume of sales, with GM having grown sales in that country by 41 per cent last year. In contrast, UK sales rose by 1 per cent and sales in Canada fell by 3 per cent.

GM is one example, but across the spectrum of large, multinational corporations in the US and Europe, the trend is the same. Emerging "new world" economies are the key focus for these companies, because that is where the growth in consumption is likely to come from.

With this year's economic growth expected to be about 2.2 per cent for the G7 countries, compared with 6.1 per cent in emerging markets (held up by the likes of China with 8.7 per cent, India with 8.2 per cent and Indonesia with 6.5 per cent), this is no surprise.

And it's not just limited to cars.

Apple is selling plenty of iPads outside the US, more than half of global bank HSBC's profits come from Asia and more than a third of Vodafone's annual revenues come from emerging markets.

Many Australian companies are focusing on emerging markets as a key growth area. Recent visitors to Vietnam will have noticed a rapidly increasing number of ANZ bank ATMs and branches around the country, and the Australian mining sector's reliance on developing nation customers is well understood.

Improving standards of living in China and India are fuelling demand. Even modest increases in the proportion of people who can afford to buy more consumer goods will lead to a significant increase in the number of potential customers for Western companies.

For local investors looking to gain exposure to these emerging economies, a strategy that has merit is to access this growth by buying shares in the large multinational industry leaders listed in the US, UK and Europe that have growing operations in these markets.

They can take advantage of low funding costs in their home markets because of historically low interest rates to reinvest in high-growth overseas markets that offer much more attractive returns.

Buying big blue chips in developed markets is also a much lower-risk way of accessing emerging markets. The transparency of their operations is greater, they have more developed reporting standards, as well as stronger governance and shareholder protections.

Some of these companies have benefited in recent years from the weak US dollar, as their overseas earnings have translated back to US dollars at favourable exchange rates.

It could be argued that should the US dollar begin to rise, this may pose risks for non-US earnings. This is true, although it could also be said that for New Zealand investors, such an impact would likely be accompanied by an increase in the value of any overseas investments (because the US dollar would also likely rise against the NZ dollar).

Perhaps one of the best examples of a company that is exposed to growth in emerging economies is Australian mining giant BHP Billiton. As the world's largest diversified resources company, with operations in about 25 countries, BHP occupies leading positions in virtually all major commodity businesses from aluminum to iron ore.

Only 8 per cent of BHP's earnings come from Australia, with the rest coming from overseas. Not surprisingly, China provides 25 per cent of company earnings and the rest of Asia a further 19 per cent.

Australia's proximity to the fast-growing Asian markets is a major positive for commodity producers like BHP. Over the medium to long term, increasing demand for commodities and supply constraints are expected to underpin returns from the sector.

In China alone, it is estimated that about 350 million of the country's rural residents will migrate to cities over the next 20 years, boosting demand for housing, roading, mass transit systems and other buildings.

ANZ remains the only Australasian bank with an exposure to the exceptional growth opportunities available in Asia, with the other three banks focused on home operations. To date, ANZ has made small investments in China, Vietnam, Indonesia, Cambodia, Laos, Malaysia and Guam.

ANZ derives 14 per cent of its earnings from outside Australia and New Zealand, and hopes to build on this, having doubled its number of employees in China and Hong Kong over the past year.

Unilever is a UK-based company that manufactures consumer goods, including food, detergents and personal care products. Its portfolio includes Dove, Sunsilk, Rexona, Lynx, Surf, Lipton and Magnum.

Last year, the company generated more than half of its turnover in Asia, Africa, Central and Eastern Europe and Latin America. Its strategy is to increase the consumption of its products with consumers of all income levels and to encourage consumers to "trade up" to higher value products as incomes rise in developing markets.

The company's key focus is to maintain its leading positions in strongholds such as Brazil and India, while investing aggressively for growth in countries that present new opportunities, notably China and Russia.

US multinational 3M produces a diversified range of industrial, consumer and healthcare products, ranging from chemicals used in aircraft maintenance to basic consumer goods such as Post-It notes and Scotch tape.

3M has a vast reach, with sales in 200 countries. More than half of sales come from outside the US and by 2013 this is expected to be as high as two-thirds. 3M is well-established in emerging markets, having operated in Brazil for more than 50 years, and is focusing on further growth in these regions.

Another US company benefiting from the growing middle class in emerging markets is technology giant Apple. Apple is seeing massive global demand for its iPads and iPhones.

Both categories are benefiting from winning additional carriers, international expansion and limited competition. The company's product leadership is translating into significant market-share growth in many of its markets, particularly outside the US.

This international expansion is paying dividends, especially in China, and Apple's sales in the Asia-Pacific region have grown 175 per cent in the past 12 months. In addition, Apple has no debt.

In fact, the company has close to US$50 billion ($65 billion) in the bank. To put that in perspective, the largest company on our sharemarket, Fletcher Building, has a total value of slightly under US$4 billion.

The Corvette will continue to be manufactured exclusively at GM's assembly plant in Bowling Green, Kentucky, where it has been since 1981. Yet, like many large US, European and Australian companies, much of GM's future growth may come from areas closer to its Shenyang or Shanghai factories.

Mark Lister is head of private wealth research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice. Craigs Investment Partners has investments in all of the companies discussed in this column on behalf of its clients.